Mexico: Election uncertainty to weigh on investment in 2018

02 October 2017

Despite recent reforms by the government to secure investment into the telecommunications and energy sectors, heightened US protectionism and the likelihood of prolonged renegotiation of the North American Free Trade Agreement (NAFTA) will likely have a downside risk on investment and economic growth. In addition, there is an elevated risk of political instability in the run-up to the elections in 2018. The Institutional Revolutionary Party (Partido Revolucionario Institucional) is unlikely to be re-elected and President Enrique Peña Nieto’s low approval rating will contribute to this outcome.

Security Environment

The primary security threats in Mexico stem from the continued prevalence in many states of powerful drug cartels and organised crime groups. Since his election in 2012, President Enrique Peña Nieto has waged an anti-narcotics campaign, deploying security forces to violent hotspots. This approach has had some successes – murder rates fell in some states, including a 24% reduction in Coahuila state in 2014-2015. However, efforts will continue to be undermined by widespread bribery. In the medium term, as government anti-cartel activity continues there may be a slight improvement in the security environment, however, this is prone to rapid change.

The inability of the Mexican government to enforce the rule of law throughout the whole country exposes foreign businesses to a range of risks. Travel in the country comes with substantial risk of express kidnapping. As drug cartels have sought to diversify revenues away from drug smuggling, express kidnap rates of foreigners have risen. Businesses that do operate in Mexico will require substantial security measures to ensure the safety of people and assets.

More positively, Mexico enjoys stable external relations with its neighbours, including the US and Guatemala, favouring trade and co-operation to conflict. The risk of interstate war is consequently low and will remain so for the foreseeable future.

Trading Environment

It is likely that tight fiscal and monetary policies will be implemented by the government over the mid-term in an effort to lower the fiscal deficit and whilst high inflation is challenged by the central bank. Modest growth of 2.1-2.2% per annum is forecasted for 2017 and 2018. Despite the risks from potential US trade protectionism and lower oil prices, Mexico’s economy has shown resilience.

It is expected that Mexico’s debt burden will continue to fall as a result of a primary surplus and peso appreciation. However, further fiscal consolidation and faster growth will be required to secure a steeper government debt decline.

On 5 September, the second round of NAFTA renegotiations was completed by Mexico, Canada and the United States. 80% of Mexico’s exports are destined for the US and as a result there will be significant implications from the renegotiations across all sectors. Labour regulations, rules of origin and dispute settlement have proved to be some of the most contentious points during the renegotiation. In addition, Mexico continues to hold the incorporation of President Nieto’s 2014 energy program in NAFTA as a priority. 

This would reduce the trade deficit of the United States with Mexico and open up its energy sector to investment. A number of these issues remain unresolved following the second round of talks. A third round of talks is scheduled for 23 to 27 September 2017. Mexico will continue to seek a way in which it can diversify its export economy and it is exploring opportunities with South America, Asia and Europe.

Investment Environment

2018 investment and growth is likely to face a headwind from election-related uncertainty. The government seeks foreign direct investment in its energy and telecoms sectors in particular, which will assist it in diversifying its trade partners and minimising any risks were the US to withdraw as a trade partner. 

There is an increasing risk of a populist shift in the general elections scheduled for July 2018. This is as a result of increasing violent crime, free trade negotiations with the US and structural reforms being negatively received by the public. Andrés Manuel López Obrador, former Mexico City administrator, has declared his candidacy and has leveraged his position to strengthen his electoral prospects. There is significant dissatisfaction with the political status quo which is evidenced in the narrow victory of the incumbent PRI in the State of Mexico gubernatorial election in June 2017. 

It is likely that there will be an opportunity for an anti-establishment candidate in the 2018 presidential election. This may result in the rolling back of reforms seen under President Nieto and a more populist agenda. Nonetheless, due to a number of checks and balances in Mexico’s institutional framework it is unlikely that there will be a significant change in the policy framework.

Mexico: Election uncertainty to weigh on investment in 2018

*** There is a lot of capacity available for Mexican risks, so underwriter line sizes are likely to be quite large.

In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for China, Myanmar, Ukraine and Democratic Republic of Congo, all of which have been the subject of recent enquiries from JLT's client base.

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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email eleanor_smith@jltgroup.com